Rise of ‘Weinstein clauses’ to shield parties during deal-making

Author: John Crabb | Published: 10 Aug 2018

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Corporates are increasingly being advised to use representation clauses that ensure sexual harassment allegations don’t lead to material damages or post-closing recourse when planning acquisitions. This works by including language in the merger documentation that requires full disclosure of any incidents.

This type of clause, referred to as the Weinstein clause, is becoming more commonplace following the so-called #MeToo scandal that erupted across all industries in 2017. It led to movie producer Harvey Weinstein’s eventual arrest and the bankruptcy of his privately-held film production company.

Given the existence of such clauses, companies must also implement measures and processes to ensure that aspects of corporate life such as training, reporting and structure reflect best practices and provide adequate protections to employees - including in the context of a potential acquisition.

“When considering acquisition targets, particularly where management is key to the success of the target business, companies should consider using these clauses, or consider implementing more robust due diligence processes and practices aimed at understanding the culture of the target business and its history of compliance,” said said Lisa Talbot, partner at Torys.

“After the Weinstein situation and other #MeToo events, it is time for companies to get their ducks in a row and make sure that they have policies and procedures in place.”

KEY TAKEAWAYS

Corporates must consider using representation clauses that ensure sexual harassment allegations do not lead to material damages or post-closing recourse when looking at acquisitions;

The clause, now widely referred to as the Weinstein clause, has become increasingly popular following the #MeToo scandal;

The reason this clause is unique is that it is obviously directed more at a subset of workplace allegations around sexual harassment;

Private equity clients in particular are interested in how they might want to incorporate these types of issues into their diligence regimes for new acquisitions.

A recent example of the clause in action is Brookfield Asset Management’s acquisition of Forest City Realty. The contract reads:

“(n) To the Knowledge of the Company, in the last five (5) years, no allegations of sexual harassment have been made to the Company against any individual in his or her capacity as an employee of the Company or Forest City Employer, LLC at a level of Senior Vice President or above.”

The clause is effectively a regular representation of warranty of the target. A purchase agreement would typically include a whole suite of representations relating to the operation of the business. It’s not unusual to get some sort of a labour claim-related litigation in connection with those kinds of generic representations.

“Arguably this would capture some of these types of claims as well, depending on what stage they are at and how significant they are,” Rima Ramchandani, also a partner at Torys. “The reason this clause is unique is that it’s obviously directed more at a subset of workplace allegations around sexual harassment, recognising that sometimes those claims may be significant, and may actually lead to material damages.”

“That’s how you see them in share purchase agreements, in the form of a representation of the target, and then depending on whether it is a public or a private M&A deal there may not be a post-closing recourse against the shareholders or the issuer,” she added.

The #MeToo movement has gained momentum is recent monthsA company involved in a sale transaction will insist that there have been no material allegations to disclose, but with a Weinstein clause in place they will have to tell the buyer if there has been one. Ultimately it comes down to how these clauses are negotiated. In most cases, representations like this had some sort of materiality standard, which depends on the leverage the parties negotiating the transactions have.

“If you are a seller you are going to want to have a very high materiality threshold so that it is unlikely it will ever be triggered,” added Ramchandani. “But if you are bidder, you are always motivated to try and get broader, cleaner representations with less materiality thresholds so that it forces the target to disclose as much as possible.”

Necessary precautions

Lauren Casazza, partner at Kirkland & Ellis, a member of the Crisis Communications and Management practice group, said that in the post-Weinstein era, the focus has been on internal investigations advising on compliance issues, offering clients advice on how to handle live #MeToo type issues, and reviewing policies to help mitigate against those matters.

“What we are finding is that our private equity clients in particular are interested in how they might want to incorporate these types of issues into their diligence regimes for new acquisitions,” they said. “Things like what types of questions they should be asking, and what types of data and information they should be seeking from targets.”

"If you are a seller you are going to want to have a very high materiality threshold so that [this type of clause] is unlikely it will ever be triggered"

Companies should be looking at this in terms of having the right structures in place to help mitigate against future issues in this space, and if something happens to know how to be best positioned to help defend the company, and have the right work place compliance mechanisms in place.

“We are definitely seeing that in practice, companies are viewing #MeToo/workplace compliance risks as enterprise level risks on par with Foreign Corrupt Practices Act corruption or cyber security risks and things that for many, many years companies have been making sure they are using the right compliance programs for,” said Ramchandani.

It is certainly a part of any M&A transaction, and this whole movement has elevated workplace compliance that has always existed, but this has really elevated it into a sphere of risks that could be like any other material risk.

“It’s been fascinating, and if anything good comes out of this movement, and it should, it is that it has forced companies to really take a hard look, both when making acquisitions and within existing portfolios, at whether the right resources and structures are in place,” she added.